Reddit Stock Soars, But It Might ‘Not Make Users Happy’, Analysts Warn

Reddit‘s share price soared as the company finally made its stock market debut. The social media platform became the first high-profile company to go public in two years by listing on the New York Stock Exchange (NYSE).

Its long-awaited initial public offering (IPO) was priced at $34 – but the stock opened at $47 as eager investors embraced the new arrival. 

Frantic early trading saw the price hit $57.80, before settling down to around $50, which is 47% above the initially set IPO price.

Reddit (RDDT) Stock Performance
Reddit (RDDT) Stock 1-Day Performance. Source: TradingView

Dan Coatsworth, investment analyst at AJ Bell, believes the impressive opening day performance is likely to turn a few heads. He said:

“Reddit’s successful IPO represents a return to pre-pandemic days when investors were happy to lap up shares in loss-making companies if they offered a compelling narrative.” 

But what are the prospects for the Reddit stock price? Should investors look to get involved immediately in Reddit investing, or is it best to let the IPO dust settle before making a move?

Let’s find out all you need to know.

Key Takeaways

  • Reddit has listed on the NYSE under the ticker RDDT on Thursday, March 21, 2024.
  • The IPO price was set at $34 in order to raise $784 million from the sale of 22 million shares.
  • It’s the first high-profile company to go public in two years.
  • Reddit’s stock price opened at $47 – 38% above the IPO price.
  • RDDT stock closed the first trading day at $50.
  • Reddit and its selling shareholders raised around $750 million, with the company collecting about $519 million.
  • Sam Altman owns 12.2 million shares of Reddit stock, according to the company’s IPO disclosure.

Reddit IPO Has Finally Happened: All You Need to Know

Reddit, which launched in 2005, classes itself as a ‘community of communities’ with its users submitting, voting, and commenting on a wide variety of topics.

The site has become one of the internet’s most popular sources of information, with 100,000 active communities and around 73 million daily active visitors.

It’s also the 15th most visited website on the Internet, according to data compiled on March 1, 2024, by Similar Web. This puts it ahead of other prominent sites such as Pinterest and Linkedin.

Reddit IPO news was announced on February 22, 2024, when the company filed a registration statement on Form S-1 with the US Securities and Exchange Commission (SEC).

Reddit IPO Details

More than 76 million people, on average, visited Reddit every day during December 2023, according to Steve Huffman, the site’s co-founder and chief executive.

In a letter accompanying the SEC filing, he recalled how the site came to life on August 13, 2005, and had been “teeming with activity” ever since.

“The conversation ranges from the sublime to the ridiculous, the trivial to the existential, the comic to the serious. Whatever people are into or going through, it is on Reddit.”

Here we take a look at the company’s decision to go public, what it hopes to achieve, and the challenges it’s likely to face over the coming months.

Reasons for Going Public

The pace at which this online community has developed is behind Reddit’s decision to pursue an IPO, even though it’s taken longer than expected to reach this stage.

“We are going public to advance our mission and become a stronger company,” said Huffman. “We hope going public will provide meaningful benefits to our community as well.”

This includes making it faster, easier to use, easier to moderate and govern, and simpler to navigate and find relevant communities.

“​​I have never been more excited about Reddit’s future than I am right now,” added Huffman.

“We have many opportunities to grow both the platform and the business, the latter through advertising, monetizing commerce on the platform, and licensing data.”

Reddit’s Financial Health

Reddit shared some important financial information ahead of its IPO to give potential investors an insight into how it operates.

The figures show that it made $804 million in revenue for the year ending December 31, 2023, which is a 21% increase from the $666.7 million generated in the previous year.

However, the company isn’t profitable.

It made a pre-tax loss of $87 million in 2023, although this was an improvement on the $158 million loss in the year ending December 31, 2022.

Reddit's Key Financial Data

Plans for the Proceeds

According to the SEC filings, Reddit plans to increase “capitalization and financial flexibility” and use the proceeds for working capital, operating expenses, and capital expenditures.

This may include acquiring or investing in “complementary technologies, assets, or intellectual property,” although it doesn’t have any such commitments at this time.

It also doesn’t plan to declare cash dividends and intends to use all available resources to “fund the development and expansion” of the business.

Investors Beware: RDDT Stock Comes With A Risk

Reddit has acknowledged that its financial performance will be “significantly determined” by its success in growing its user base.

“If our platform is not perceived to be high-quality, relevant, reliable, trustworthy, or innovative, we may not be able to attract or retain Redditors or otherwise maintain or increase the frequency and duration of their engagement,” it stated.

To grow it also needs to penetrate additional demographics. This, of course, presents its own potential problems.

“We may not be able to increase the number of Redditors in other demographics, and as a result, our user base may not grow,” it added.

Market Challenges

There’s no doubt that Reddit has plenty of potential, but there are issues to tackle, according to Susannah Streeter, head of money and markets at Hargreaves Lansdown. She said:

“Reddit has no problem getting eyes on screen, but it has had a challenge so far in working out how to monetize its large and growing fanbase who are obsessed with using its message boards.”

That’s why advertising is crucial to Reddit, with Huffman having declared advertisers regard it as a great place to find high-intent customers that they can’t reach elsewhere.

“Advertising on Reddit is rapidly evolving, and we are still in the early phases of growing this business,” he pointed out in the SEC filing.

However, while its increasing ad presence should provide relatively steady income streams, Streeter doesn’t believe it will shoot the lights out, so there needs to be other sources.

Reddit’s AI Potential

“The real potential is likely to come from making the most of its vast store of data in the form of a deep well of conversations on the site. This could be harvested by AI models, and in its prospectus, the company revealed it’s already been licensing some data.”

Streeter believes this direction of travel looks even more likely given that Open AI‘s Sam Altman is a key investor, controlling 9.2% of the voting power.

Separately, the longer-term structure is also likely to come under scrutiny.

“The governance structure has been questioned given that it cements control of the company among current investors and company insiders with very limited voting rights for new shareholders,” she added.

Partnership with Google

In February 2024, Reddit and Google announced they were deepening a partnership that has been in place for many years.

This includes allowing Google to use the Reddit Data API to improve its services, including supporting new ways to display Reddit content.

“Our work with Google will make it easier for people to find, discover, and engage in content and communities on Reddit that are most relevant to them,” it declared.

Reddit Dramas & Controversies

Although Reddit is in the headlines for its own listing, the site has courted controversy for affecting the valuations of other companies.

Its WallStreetBets subreddit, which has 15.2 million members, is credited with influencing the stock prices of companies such as GameStop and AMC.

When such social media hype bolsters the popularity of companies, they become known as ‘meme stocks,’ and Reddit has certainly been the launchpad for these in the past.

Letter from Nokia

​​Reddit has also received a letter from Nokia Technologies alleging it has infringed some of the company’s patents.

The disclosure comes as the US Federal Trade Commission conducts an inquiry into Reddit’s sale, licensing and sharing of user-generated content.

According to reports, Nokia is seeking compensation for the use of key inventions and will reinvest the royalties in the development of next-generation communication and multimedia technologies.

API Revolt

Reddit ran into a storm of controversy last summer after announcing changes to the site’s API pricing for third-party developers.

Its mass user protest resulted in many communities (known as subreddits) going offline for days, but Reddit stuck to its decision.

“Reddit needs to be a self-sustaining business and to do that, we can no longer subsidize commercial entities that require large-scale data use from our API,” it declared.

Reddit Stock Price Predictions and Latest Analyst Views

So, what are the views of analysts on Reddit stock? Is RDDT stock a ‘Buy’ immediately after the launch?

Susannah Streeter at Hargreaves Lansdown believes Reddit’s IPO could be extremely popular. She said:

“Given the social media platform is a household name and there has been a distinct lack of opportunity for investors to get their hands on new listings, there is likely to be a surge of interest in the stock when it begins trading.”

Streeter pointed out that the IPO was believed to have been oversubscribed multiple times, even though the company is still loss making and a steady path to profitability is far from clear. She added:

“The IPO will give Reddit a strong balance sheet to pursue a path towards profitability and growth, but with so much power concentrated in a few hands, risks of missteps are higher,” she added.

Dan Coatsworth, investment analyst at AJ Bell, believes its shares have been a hit at IPO because of Reddit’s link to artificial intelligence, which is a hot investment theme.

“​​Reddit is seen as one of the engines that will feed AI models,” he said. “Consumers are talking about all kinds of topics, themes and products, offering advice and sharing their experience and knowledge. This information is incredibly valuable and Reddit has begun to license this content to third parties.”

Of course, whether users are comfortable with Reddit making money off their contributions is another issue entirely. It also presents a risk that people stop using the social media network in the long term.

“Investors have a ferocious appetite to buy shares in anything linked to AI, as evident by the storming share price performance of names like Nvidia and Meta Platforms over the past year or so,” he added.

Coatsworth also believes Reddit’s long list of ideas to improve the user experience has also drawn investors to the stock.

However, there are potential downsides to consider.

“Reddit has fast revenue growth and very chunky gross margins, both a big tick in the box for investors,” he explained. “But it is losing money. That needs to change and is something which prospective investors need to consider hard if they are interested in the shares.”

Danni Hewson, AJ Bell’s head of financial analysis, believes Reddit has a “coolness” that’s just not present on other social media platforms. She said:

“Beloved by its users, there are concerns that taking the company public could mean it starts to prioritize making money over making users happy.”

It’s also not made money yet, she pointed out, even though its millions of loyal users are seen as prime targets for ambitious advertisers. Hewson added:

“Reddit’s boss has made a big play for users to become owners, but that kind of utopian ideal is something more likely to be found in a Netflix series than in IPO reality.”

More broadly, Hewson believes the $6.4 billion valuation is way below what it was expected to achieve back in 2021.

“Markets have changed and even if things are picking up and IPOs seem to be coming back into fashion, it shows the toll the last few years have taken on investor sentiment,” she said.

Alan Vaksman, founding partner at Launchbay Capital, believes Reddit is the first of several tech-focused IPOs that we could see take place. He said:

“I do not foresee this particular IPO to have a major impact on the ecosystem as a whole because of the risky nature of the offering.”

Whether or not it proves to be a success, therefore, is likely to influence the outlook for future IPO stocks. This is particularly the case if its valuation falls after the listing.

Vaksman added:

“If the drop is very sharp this will lead to the other companies thinking twice about the current plans and look at ways to delay the listings further as there’s definitely correlation between the prices in the secondary markets and the expected trading post-IPO.”

How to Buy Reddit Stock

These are the key steps to consider if you want to buy Reddit stock.

The Bottom Line

Reddit finally coming to the stock market is an exciting development, particularly given the fact that the global IPO market has been quiet for two years.

However, a lot will depend on how RDDT stock performs over the coming months and the scale of longer-term investor enthusiasm for the stock.

The key to the success of the Reddit IPO will be whether the company succeeds in growing its user base and advertising revenues.

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